Working capital loans: fact vs. myth

What is a Working Capital Loan?

A working capital loan is a loan that has the sole purpose of financing the everyday operations of a business. Working capital loans are not always used to acquire long term assets, but instead to cover short term funding expenses such as accounts payable and employee wages.

Here we will review some facts about working capital loans that every business owner should know:

1. “Working capital loans have much higher approval rates when compared to conventional bank loans.” This is due to the fact that working capital loans are generally more flexible with things such as terms, rate, and a lack of a personal guarantee.

2. “Your credit score doesn’t have to be impeccable.” If you are having doubts about taking out a working capital loan due to bad credit, don’t worry, there are other factors lenders place a bigger focus on such as annual revenue, your business’s credit score, monthly deposits, and average daily balances.

3. “There is no collateral needed.” Unlike conventional bank loans, collateral is not required in order to be granted a working capital loan.

4. “Daily and weekly payments are designed to be manageable.” These payments are scheduled and meant to be small, fixed amounts. As we know, it can be difficult for some business owners to pay out large sums of money on a monthly basis, so the larger sum is broken down into much smaller weekly or daily payments.

5. “You can pay your business working capital loan back ahead of time in order to save on interest.”  While this is not necessarily true of all lenders, most lenders (including us!) are willing to offer early payment discounts.

6. “Bankruptcy issues from your past wouldn’t come back to haunt you.” If you happen to have declared bankruptcy in the past, don’t get worked up. Your working capital loan application will still be considered.

Now let’s touch upon working capital loans myths:

1. Most outsiders assume that business owners take out a working capital loan because they are desperate for cash. However, this is not the case. For example, businesses that have slow periods, such as seasonal businesses, use this type of loan regularly in order to both bridge said slow periods and wind-up operations at the beginning of peak season.

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2. ”You can use this loan for anything you want” said no lender ever. Working capital loans are only to be used for the expenses of running a business. While they can be used for absolutely any facet of the business as the owner sees fit, they cannot be used for personal expenses or projects.

3. “All lenders care about is your credit score.” This is 100% myth. As stated earlier in the article in fact #2, when applying for a working capital loan, you are not required to have an excellent credit score. In fact, personal credit score is just a small piece of the larger puzzle underwriters put together when assessing your eligibility for a working capital loan.

4. “It is safe and acceptable to borrow as much as I want.” Even though working capital loan amounts are fairly flexible, it is not a smart business decision to borrow an absurd about of money. Don’t forget, the loan will have to be paid back and the longer it takes you the more interest you’re paying.